SPAC vs IPO: Difference, Benefits, Pros and Cons

When a private company reaches a stage where it wants more capital and visibility, one big question arises: How should it go public?

There are two options to choose from: SPAC (Special Purpose Acquisition Company) and IPO (Initial Public Offering). They seemingly both end the same way. The company is traded on an exchange, and investors are buying shares. The route taken—process, speed, risks, and investor experience—is very different, though.

As an investor, being familiar with the difference matters. Choosing to invest in a company going public via an IPO or through a SPAC can affect your risk, your returns, and how confident you feel about the numbers.

Let’s dive into SPAC vs IPO at length—what they are, how they operate, what benefits they offer, and what their pros and cons are.

What is an IPO?

An Initial Public Offering, or IPO, is the classic method that companies use to list on the stock exchange. It's like the company is graduating from being private to being public.

This is how it typically works:

• Hiring underwriters – The company partners with investment banks (like Goldman Sachs or Morgan Stanley). These banks help with pricing, regulatory filings, and pitching shares to institutional investors.
• Regulatory filings – The corporation makes and files a registration statement (like the famous S-1 in the US) with the authorities. It comprises audited financial statements, disclosure of risks, and information about the company.
• Roadshow – Company executives and bankers introduce to potential investors over several meetings, basically “marketing” the IPO.
• Pricing and listing – Depending on demand and circumstances in the market, the IPO price is determined. The firm lists its shares on an exchange such as NASDAQ or NYSE.

IPOs are usually attractive to investors because:

• The company is generally organized.
• There’s a detailed financial disclosure.
• The process is carefully controlled, reducing uncertainty.

Yet IPOs also have their eccentricities, such as underpricing (shares “popping” on issue day, i.e., initial institutional investors tend to gain the most).

What is a SPAC?

A Special Purpose Acquisition Company (SPAC) takes a different path. It’s sometimes called a “blank check” company for a reason: when it first goes public, it has no operations.

Here’s how it works:

• SPAC formation – A group of sponsors (experienced investors, former CEOs, or private equity leaders) forms the SPAC. Their reputation is what convinces early investors to buy in.
• SPAC IPO – The SPAC initially raises capital through sales of shares to the general public. It’s fast and light, since there’s no business model or revenues to report.
• Looking for a target – The SPAC has cash deposited in a trust. It typically has 18–24 months in which it has to look for a private company it can merge with.
• The merger (de-SPAC) – The SPAC merges with the identified target. The company becomes publicly traded in nearly no time.

For investors, a SPAC is a way to back the dealmakers first, the company second. You’re betting that the sponsors will find a high-potential private company worth taking public.

SPACs proved very popular during 2020–2021 since they allowed fast IPO listings during a period of volatility. However, not all of them met expectations.

SPAC vs IPO: The Primary Difference

The distinction between SPAC and IPO is based on what propels the process.

IPO – It goes public. It makes the filings, investor presentations, and lists shares.

SPAC – A pre-listed SPAC combines with a private company, making it public in an instant.

It gives rise to large variations in:

1. Speed: IPOs take 12–18 months on average. SPACs can take as little as 3–6 months.
2. Transparency: IPOs require careful disclosure. SPACs are less stringent while undergoing the merger process.
3. Pricing: IPO share prices are market-driven. SPAC valuations are privately negotiated.
4. Investor interest: IPOs are centered on the company’s fundamentals. SPACs are centered on the sponsor’s track record and the choice of their target.

Benefits of SPAC vs IPO

Each path offers benefits, depending on whether you’re the company going public or the investor evaluating opportunities.

Benefits of IPOs

• More transparency – IPO filings contain audited financials, risks, and forward-looking statements. As an investor, you gain complete clarity on the business.
• Credibility boost – The IPO process is demanding. If a company makes it, it signals maturity and strong governance.
• Market-driven pricing – IPO share prices reflect demand from institutional and retail investors.
  
  

Benefits of SPACs

• Speed to market – It takes months for firms to be able to go public. That’s decisive in high-paced industries like biotech or fintech.
• Negotiated valuations – The companies skirt IPO day price volatility through negotiating valuations with the SPAC directly.
• Experienced sponsors – Many SPAC sponsors bring networks, credibility, and guidance. This can add value post-listing.

When deciding the benefits of SPAC vs IPO, it's all trade-offs: IPO’s benefits are trust and familiarity. SPAC’s benefits are speed and flexibility.

Pros and Cons for Investors

Let’s zoom in on what’s most important for you: the investor.

IPO Pros

• Data-intensive decisions – Investors are provided with more disclosure to scrutinize.
• Established brands – IPOs tend to involve companies with proven products and customers.
• Liquidity and stability – IPOs typically attract institutional investors, which can stabilize early trading.

IPO Cons

• Pricing games – IPOs are often underpriced to benefit institutions, leaving retail investors buying at inflated prices later.
• High costs – IPOs deduct company proceeds (maximum 7% underwriting costs). That expense impacts valuation eventually.
• Timing risk – Sentiment in the market can make or break an IPO. Poor timing can crush investor sentiment.
  
  

SPAC Pros

• Quicker deal flow – Funds do not need to hold on to investments for several years.
• Direct negotiations – Some deals allow investors to buy in at a pre-agreed price, avoiding IPO hype.
• Sponsor expertise – Support for a sponsor with a proven record is a calculated gamble.

SPAC Cons

• Lower transparency – Target companies don’t provide the same degree of disclosure as IPOs.
• Dilution risk – SPAC sponsors typically take 20% of shares, diluting investor upside.
• Mixed results – Most SPACs underperform, and thus, investor due diligence becomes paramount.

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SPAC vs IPO: Side-by-Side Comparison

Why Do Companies Prefer One over the Other

It’s more than a cash matter from the point of view of the company. It’s also control, speed, and optics.

Selecting IPO – Those seeking credibility, transparency, and long-term institutional confidence will opt for IPOs. Airbnb, e.g., selected the IPO route in 2020, even during COVID-19, in order to show strength.

Selecting SPAC – SPACs are usually favored by companies in fast-paced industries. DraftKings used the SPAC route of going public, capitalizing on the rapidly growing online betting sector.

Conditions in the market also count. If IPO markets are "cold," SPACs are appealing alternatives.

Real-World Examples

Examples that make the SPAC vs IPO debate real:

Traditional IPO: Facebook (today Meta) in 2012. Despite initial turbulence while trading, the IPO process provided credibility and open disclosure of the Company’s huge expansion ambitions to investors.

SPAC Example: In 2019, Virgin Galactic merged with Chamath Palihapitiya’s SPAC. It brought retail investors into the space tourist dream earlier than a conventional IPO would have done.

Some succeeded. Others, such as Nikola (an electric vehicle company through a SPAC), experienced scandals and huge losses. This is why due diligence matters.

Risks for Investors

Both IPOs and SPACs come with risks:

IPO Risks – These IPOs eventually crash once the initial euphoria wears off. Later investors buying in usually lose heavily.

SPAC Risks – Bad target firms or mismatched sponsors can dilute investor value. Research finds numerous SPAC shares sell below the issue price of $10 after the acquisition.

It’s a lesson every investor should learn: don’t be caught up in hype. Be sure to review the fundamentals of each company and the leaders’ records.

The Investor Mindset: How to Approach SPAC vs IPO

When evaluating SPAC vs IPO opportunities, your mindset matters just as much as the numbers. 

IPOs are often safer because of the strong disclosure requirements, but they don’t guarantee returns. Think of them as “steady, data-rich bets.” 

On the other hand, SPACs can feel like speculative plays. You’re betting not just on the company, but also on the sponsor’s ability to strike the right deal.

For IPO investing, be fundamentally oriented. Consider revenue growth, market share, profitability, and position within the industry. 

For SPACs, your due diligence is broader—who are the sponsors, what industries they are focusing on, and what has been the performance of their previous deals?

For example: 

Angel investors should consider what these paths do to exit strategies. A company you invest in today may be more likely to exit through a SPAC than an IPO, based on cycles in the market. Understanding both paths allows you to forecast more reliably the date of liquidity events and take greater control over risks.

In summary, be financially disciplined in approaching IPOs and wary of SPACs based on the credibility of leadership. Both are promising paths. Your task is to distinguish hype from value.

SPAC vs IPO: What's Best for Investors?

So, what takes the prize in the SPAC versus IPO showdown?

It depends on your objectives:

If you value trust, disclosure, and stability, IPOs are safer.

If one is comfortable assuming higher risk in return for higher return, SPACs hold the promise of large returns—if executed correctly.

For angel investors, both ways are relevant. They determine how your portfolio companies will ultimately exit. An early-stage wager that culminates in a high-profile IPO or successful SPAC merger can generate high returns. 

‍Key Takeaways 

1. IPO = slow but reliable. Comprehensive disclosures, but expensive and market-led. 
2. SPAC = fast but risky. Fast listings with sponsor-based valuations, but reduced transparency. 
3. The benefits of SPAC vs IPO hinge on whether speed and flexibility are more important (SPAC) or trust and stability are desired more (IPO).
4. Investors should continually balance dilution, visibility, and long-term performance. 

‍The Future of SPAC vs IPO

The SPAC vs IPO debate is far from over. SPACs skyrocketed in 2020 and 2021, but their success has been inconsistent since. 

• Regulators are increasing regulations around SPAC disclosure, which will perhaps bring SPACs closer to IPO-like clarity. Meanwhile, IPO markets are cyclical. They boom when sentiment among investors is great, freeze up when volatility spikes. It also means that investors will continue to have shifting opportunities.
  
  
• When markets are bullish, IPOs will be ahead due to the higher valuations available. When markets are unsure, SPACs may re-emerge as speedier, more agile alternatives. New industries like space exploration, EV, biotech, and AI would be drawn towards SPACs because of speed to market.
  
  
• Established cash-generative companies will continue to opt for IPOs. The future may even combine the two. Some predict "hybrid" versions where IPO-level disclosures and SPAC-like flexibility intersect. 

For investors, it’s about remaining open-ended. Do not commit your future self to one model. Instead, learn about both and be able to recognize the best odds regardless of whether the company follows one or the other. 

The bottom line: IPOs and SPACs will both remain in the playbook of the public market. Your job is to navigate through the cycle with knowledge and flexibility. 

‍Final Thoughts

SPAC and IPO are two different entries that lead through the same door—public markets. To investors, it’s what’s beyond the door, and not the choice of door. 

Do you support an organization with sound fundamentals? Do you believe in the management? Do you believe in the valuation? It is more about answering those questions than what path one takes. 

If becoming a more intelligent investor is your goal, it’s helpful to learn about exits such as IPOs and SPACs and how they frame the investment process. Angel School’s Venture Fundamentals course will teach you how startups fund, grow, and exit, and how you, as an investor, can position yourself for success. Join now! 

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